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What Is Cyclical Unemployment?
Cyclical unemployment is the unemployment correlated with the business cycle. Unemployment typically rises during recessions and declines during economic expansions. Cyclical unemployment is one factor among many that contribute to total unemployment. Others are seasonal, structural, frictional, and institutional factors. Dealing with cyclical unemployment is a major theme in the study of economics and the goal of various policy tools that governments use to stimulate the economy. The unemployment associated with the 2008 financial crisis was cyclical unemployment.
Key Takeaways
- Cyclical unemployment fluctuates with economic recessions and expansions, peaking during downturns and declining during upturns.
- During recessions, businesses reduce labor demand, increasing cyclical unemployment.
- The 2008 financial crisis exemplified cyclical unemployment when 1.5 million construction workers lost jobs.
- Cyclical unemployment is distinct from structural, frictional, seasonal, and institutional unemployment, which can persist even in strong economies.
Key Drivers of Cyclical Unemployment
Cyclical unemployment relates to the irregular ups and downs, or cyclical trends in growth and production, as measured by the gross domestic product (GDP), that occur within the business cycle. Most business cycles eventually reverse, with the downturn shifting to an upturn, followed by another downturn.
Economists describe cyclical unemployment as the result of businesses not having enough demand for labor to employ all those who are looking for work at that point within the business cycle. When demand for a product and service declines, there can be a corresponding reduction in supply production to compensate. As the supply levels are reduced, fewer employees are required to meet the lower standard of production volume. Those workers who are no longer needed will be released by the company, resulting in their unemployment.
When economic output falls, the business cycle is low and cyclical unemployment will rise. Conversely, when business cycles are at their peak, cyclical unemployment will tend to be low, because there is a high demand for labor.
Cyclical Unemployment in Economic Downturns: 2008 Financial Crisis
During the financial crisis in 2008, the housing bubble burst, and the Great Recession began. As more and more borrowers failed to meet the debt obligations associated with their homes, and qualifications for new loans became more stringent, the demand for new construction declined.
As unemployment rose and more borrowers defaulted, foreclosures increased, further reducing construction demand. As a result, approximately 1.5 million workers in the construction field became unemployed. This rise in unemployment was cyclical unemployment.
As the economy recovered over the following years, the financial sector returned to profitability and began to make more loans. People began buying homes again or remodeling existing ones, causing the prices of real estate to climb once again. Construction jobs returned to meet this renewed demand in the housing sector, and cyclical unemployment declined.
Important
Multiple types of unemployment often exist at the same time.
Comparing Cyclical Unemployment With Other Forms
Economists recognize cyclical unemployment as a main type of unemployment. Other types include structural, seasonal, frictional, and institutional unemployment.
Structural Unemployment
Structural unemployment stems from fundamental changes in the economy, like job losses in sectors overtaken by new technologies, such as automobiles replacing buggy whips. It is a mismatch between the supply and demand for certain skills in the labor market.
Frictional Unemployment
Frictional unemployment is short-term joblessness caused by transitioning from one job to another, including the time spent job searching. It naturally occurs even in a growing, stable economy, and is actually beneficial, as it indicates that workers are seeking better positions.
Institutional Unemployment
Institutional unemployment arises from factors like high minimum wages, discriminatory hiring, or strong unionization. It results from long-term or permanent institutional factors and incentives in the economy.
Seasonal Unemployment
Seasonal unemployment happens when demand changes with the seasons. This category can include any workers whose jobs are dependent on a particular season. Official unemployment statistics will often be adjusted, or smoothed, to account for seasonal unemployment. This is known as a “seasonal adjustment.”
For example, teachers may be considered seasonal, based on the fact that most schools in the U.S. cease or limit operations during the summer. Similarly, construction workers living in areas where construction during the cold months is challenging may lose work in winter. Certain retail stores hire seasonal workers during the winter holiday season to better manage increased sales, then release those workers after the holidays when demand lessens.
Special Considerations
In most cases, several types of unemployment exist at the same time. With the exception of cyclical unemployment, the other classes can occur even at the peak ranges of business cycles, when the economy is said to be at or near full employment.
How Is the Rate of Unemployment Calculated?
The U.S. unemployment rate is calculated by dividing the number of unemployed persons by the number of persons in the labor force (employed or unemployed) and multiplying that figure by 100.
What Is Considered a High Rate of Unemployment?
Unemployment rates that reach 10% are considered high. During the height of the COVID-19 pandemic, the unemployment rate reached 14.8%.
What Is the Difference Between Unemployment and Underemployment?
Underemployment is a measurement of the number of laborers in an economy who are unwillingly working in low-skill and low-paying jobs, in addition to those only working part-time who are unable to secure full-time jobs.
The Bottom Line
Cyclical unemployment is a key economic phenomenon that fluctuates with the business cycle. It can impact the broad unemployment rate during recessions and expansions. It’s important to understand cyclical unemployment as it influences economic policy decisions aimed at stimulating the economy during downturns. Cyclical unemployment is distinct from other types of unemployment, such as structural, frictional, seasonal, and institutional unemployment. Each is driven by different factors. The 2008 financial crisis underscored the way that economic recovery strategies can reduce cyclical unemployment’s impact.
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